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The television airwaves are filled with pitches for home equity loans. Former Baltimore Oriole Jim Palmer and Miami Dolphin Dan Marino extol their virtues: pay off credit card debts, take vacations, or buy that new car you've been drooling over.
What the advertisements don't tell you, however, can hurt you, says Tom Coates, executive director of Consumer Credit of Des Moines.
Take Dan and Sarah Brooks. The couple had built up equity in their home and saw a loan as a smart, tax-advantaged way to use credit. When shopping for a new car, they had three options: pay cash, secure a consumer loan or get an equity loan.
The Brookses opted for a home equity loan of $60,000 -- the smallest amount they could borrow. The interest rate was 6.48 percent. Had they chosen dealer financing, the couple would have paid $4,000 in interest over four years. By using a home equity loan, they paid almost $11,000 in interest over 10-15 years.
"Because the loan is stretched out over 10 to 20 years, you'll pay more than if you borrowed the traditional way," says Dan Lieberman of Oakland, California's Mirada Home Strategies.
That's not necessarily true, claims Ann Wagner-Hauser, president of the Des Moines bank market for Norwest Bank Iowa.
"Using a home equity loan to purchase an auto offers a longer amortization period and it's secured with a larger life asset -- the home. You're taking the same dollars and stretching them out over a longer period of time. Depending on...